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Privatizing Social Security

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In a post in a different thread, someone mentioned Bush's "Social Security plan".

Social Security ought to be eliminated, not reformed. This does not mean that it should be shut off overnight, leaving old folk without their checks; but, in principle, it should be wound down within some reasonable duration.

However, if we get a plan along the lines that Bush is proposing, would that be a step in the right direction? Since there have been various version, I will lay out the "plan", as I have heard it described:

1) Individuals will be allowed to "direct" some of the money they pay toward social security toward a set of government-approved investment vehicles. The government will remain the "custodian" of the accounts.

2) The method of inflation-adjustment will be changed to that so that payouts increase more slowly for wealthier people.

3) The rules governing the total amount an individual pays into the system (public plus "privately-directed" components) will not be changed significantly.

As it stands, there is too little in such a plan for me to support it. I would rather see it killed. The biggest risk I envisage is the added excuse for government to control industry.

In the 60s and 70s Ayn Rand mentioned the anti-trust laws as being the first thing she would like to see rolled back, because they were destructive and arbitrary. In the post-bubble era, the government has used the anti-business mood of the public to persecute businessmen arbitrarily. Practices that have been norms in business have been used to extort millions of dollars and to force the retirement of extremely productive men. My biggest fear with a private account held via the government rather than via (say) an IRA or 401(k), is that folks like Spitzer have an even bigger excuse to go after businessmen.

I would be happy with a system that simply said you could pay less into the system if you put a certain amount into an IRA. For instance, for every dollar you invest in an IRA or 401(k) you can pay 25 cents less to Social Security, but the government will have almost no control on the vehicles of investment -- i.e. the specific types of investment.

I think Bush's "plan" is too much like the proposals for introducing a sales tax. A whole new dimension of control. No thank you.

Actually, the social security system is not that difficult to fix. It is a pay-as-you go system anyway. And, it currently receives more than it pays out. Starting today, it should only taken in as much as it needs to pay out. Next, it should stop paying out more than it takes in.

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Rob Trascinski had some interesting commentary on this in TIA Daily. He mentioned that the Bush plan actually does help, a little; it paves the way to phase Social Security out entirely in, oh, thirty to seventy years. :lol:

The reason is, that if benefits increase slowly for the middle class, eventually the Social Security that they will recieve will be so negligable that it will be percieved as a welfare program for the poor, and strictly welfare programs in this country have a long history of being subjected to cuts until they cease to exist. People don't have much patience with straight out-and-out "welfare".

This is actually, Rob said, the reason that the Left is so viciously opposing the Bush plan; they know it will eventually make Social Security indefensable and eliminate it altogether.

Thirty to seventy years is too long to wait, though. Social security is a massive portion of the budget. So I think the best thing to do is to support the Bush plan, which is all we're likely to get at the moment, and then start actively telling people that it's really just "welfare", and support candidates (assuming you can tolerate their other policies) that want even more privatization.

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Rob Trascinski had some interesting commentary on this in TIA Daily.  He mentioned that the Bush plan actually does help, a little; it paves the way to phase Social Security out entirely in, oh, thirty to seventy years. 

Yes, I read that. I agree with the principle that anything that makes the taxation-aspect of social security more obvious is better. However, packaged along with more government control of funding of industry, I'd have to weigh it carefully. As the plan has been proposed today, I',m against the whole deal.

Now, if the Bush administration were to introduce "mean testing" as a stand alone change, I'd have to go for it. If they said they wanted to increase the tax, I'd be against it.

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This really does remind me of the cold war. The Austrian School and libertarians said that eventually Communism would collapse under its own weight so all we had to do was sit back and do nothing. Conservatives said we should help it with a push here and there. Democrats, well, they thought we were the problem.

That being said, the left really does hate the whole idea simply because it does show that the whole system is a grand Ponzi scheme and will eventually collapse under its own weight. They'd rather pretend that it's not true or even it if is wait for 50 years or so until it "truly" is a crisis and then do something about it. The idea of means testing is interesting in that it would deny money to people who don't "need" it even though they paid it into the system. Mind you, they were still promised the whole way in that there would be a payout in the end so for the punishment of saving and being frugal and succesful, they get hosed. This sort of bait and switch is another reason the government is glad it can't be sued.

I remember when Ron Paul (I think) said the big difference between Republicans and Democrats was if the Democrats proposed burning down the library of congress, the Republicans would be ok with it as long as it was done in stages and done by private contractors.

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Social security "privatization" is a step towards national socialism.  Here is one story that explains the problems with it: http://www.mises.org/story/1751

And that is exactly why the Bush plan is horribly bad. Allowing people even to invest a portion of their social security "savings" in the market would give government agencies the right to vote proxie or in the place of investors. This allows them to have a say over corporate governance. If you don't think it can happen, look at CALPERS and how they stick their nose in everyone's business. BTW: That is the California Public Employee Retirements System which is just about the biggest shareholder out there.

Given the size of the system, when they invest they buy VERY big chunks of companies and become controlling interests in companies. Needless to say, I don't really want the State of California, much less Congress and its appointees telling me how to govern my company. Given the amount of money involved, the US govt would almost instantly become the world's largest streetname shareholder.

For those of you that have stock investments, you may notice those proxie statements you get in the mail every once in a while. Technically, your broker is holding the stock itself in street ie. their name. If you don't go to the meeting and vote yourself or mail them back in, your brokerage or their appointed representative will vote for you. When you own a mutual fund or any other sort of partnership, the managers always vote in your interest for the individual companies in the portfolio.

If you don't like me and the way I vote as a financial advisor, you can always take your money elsewhere; with Social Security you are quite frankly screwed....

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Dag. It never occurred to me the power that private accounts would give the Federal Government.

Will the money they get from a portion of Social Security be enough to hold majorities and who exactly would make the calls on what to do with that voting power?

Edited by RosszValaki
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Dag. It never occurred to me the power that private accounts would give the Federal Government.

Will the money they get from a portion of Social Security be enough to hold majorities and who exactly would make the calls on what to do with that voting power?

They don't need to have a majority of shares. Even if you hold just 10% you hold the company by the gonads. Reason being is it is very hard to get a majority of shareholders to agree on anything. Actually, think of any group you have ever been in, the bigger the better. Try some freshman English class. Now try imagine coming to a majority vote as to what y'all want for lunch. It's going to be ugly and take forever.

Now, if someone could guarantee to deliver 10-15% of those votes as long as you agree that the food is vegitarian, then for the sake of saving a few hours of arguing and hunger you agree and propose veggie burgers, veggie pepperoni pizza, etc. You see where I am going.

If, and that is a VERY big if, the plan passed and they allowed investments in something other than government bonds, they would be so restricted (you'd see Enron, Worldcom, and .bombs thrown around alot) they would be stuck investing in blue chip, mega cap, well established companies or indexes. They sheer volume again would run prices up like a scalded dog. Index wise, if they allowed indexing, there must be an offsetting transaction. In English, if you buy 1 share of the DIA Dow Index, you are buying 1/100th of the Dow Index. So what they have to do is go and buy 1/100th of each of the 30 stocks proportionally on the Dow index. That is how the government would be able to take control of corporations in the US that would make the most militant National Socialist envious. They would be holding those shares for us.

They'd need to create a new agency, let's call them the "Safe Careing Responsible Investment Agency." They would be acting just like Vanguard, Fidelity, Rydex, etc. So each time you put a dollar into the SCRIAF, they'd go out and buy $1.00 of stock. That $1.00 of stock would then be held by them. The fund would get any capital gains and dividends that would be paid out by the individual stocks inside of it. However, the individual stocks and the voting rights attached to them would be held by the SCRIA. They would then vote at various shareholder meetings, demand changes inside companies, etc, for the "benefit" of the shareholder of the fund.

Even if they did something like allow us to choose to invest in a Vanguard index fund or one of the ETF's, the boards of the funds would bend over backwards to do what the govt told them becuase they'd hate to loose that trillions of dollars of business.

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Problem is, Bush is trying to save the system. This is what Bush said about social security at his latest press conference:

Franklin Roosevelt did a wonderful thing when he created Social Security. The system has meant a lot for a lot of people. Social Security has provided a safety net that has provided dignity and peace of mind for millions of Americans in their retirement.

It doesn't sound like he wants to abolish, or even eventually abolish the system. He is an altruist, a paternal figure who believes we have a duty to help those in need - whether fellow Americans or Iraqis.

The "privatization" scheme is worse than what we have today. The government will establish control over your property by giving you a "choice" in government directed investments. That's not a choice - it's like the choice between drinking poison or eating glass (hat-tip to Bloc Party for the lyrics). These securities would net about a 4% rate of return overtime. This is in comparison to corporate bonds which net about the same rate. The S&P 500? About a 10.5% rate of return (averaged over the last 50-60 years). Furthermore, with means testing it will become a welfare program which is more than a simple transfer payment.

But, with the means testing they aren't raising the taxes on the wealthy (if $90k/year is wealthy in America today.. it's middle class here in Central New Jersey), but rather cutting their benefits. It's smart politically because it would actually resemble a welfare program and people might be up in arms.

My opinion is that younger people (including us O'ists or students of) should pretend that the money will be gone. Worst case scenario? Every dime taken from us in payroll taxes just evaporates, and we cannot rely on the scheme to continue. By investing in property, stocks, etc you can easily achieve 10% compounded returns over the period of 25-40 years which gives you a good amount of money to retire on - social security or not.

The CATO institute's mini-book on social security "Common Sense, Common Dreams" should be required reading for all. It's a wealth of info on the subject of social security, the Ponzi scheme and what the impact of privatization would be.

Bush's "reform" would keep the system going. I like the analysis that if you just let the system run its course it would fall apart anyways (just like Communism would). Sure, the brunt of the impact would be felt by those of my generation, the generation which will be getting ready to retire in 2040, but that's the price I'm willing to pay for more freedom for my children and grandchildren.

Also, it's funny that the conservatives are acting more 'progressive' by seeking reforms that the liberals are more traditional by seeking to keep the system. It shows there is not a drop of principle in Washington today.

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Here is an enlightening article on the issue;

Bush's Impossible Social Security Plan by Robert Murphy, The Mises Institute.

Bush's error (on a variety of policies) is his timing. He acknowledges that a problem indeed exists, but then proposes a poorly-planned order of solving it. The proper path to take in correcting federal finance predicaments would begin with initiating a drastic decrease in federal spending- in real terms.

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  • 2 weeks later...

Many politicians would like nothing better than to control companies via a huge government controlled pension system. However, chances are that if a so called "privatization" scheme were to move ahead, it would be a more subtle version: to make it more acceptable to various lobbies.

At least in the first such move, it is unlikely that the government will have control of the funds in the same way as (say) CALPERS, or another pension fund. The current "proposal" appears to be that the government will be "custodian" of the funds, but will not direct the investment. The government will play a role similar to that played by a brokerage firm that holds an self-directed IRA account, in the role of a custodian.

So, the control will be more subtle. I would imagine it would take two forms: firstly, the government would create a set of rules about the types of investments possible. It's easy to see how these rules can mutate over time to impose more restrictions on companies. It might start with: "we cannot let people invest in risky penny stocks", it might slowly morph to: "It's wrong to let pension funds be used to invest in companies that do not do XYZ" (fill in the blank with some act that is considered an "obvious corporate social responsibility").

The second, and more subtle form of control, would be a strengthened claim to prosecute companies "in the public interests".

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Many politicians would like nothing better than to control companies via a huge government controlled pension system. However, chances are that if a so called "privatization" scheme were to move ahead, it would be a more subtle version: to make it more acceptable to various lobbies.

At least in the first such move, it is unlikely that the government will have control of the funds in the same way as (say) CALPERS, or another pension fund. The current "proposal" appears to be that the government will be "custodian" of the funds, but will not direct the investment. The government will play a role similar to that played by a brokerage firm that holds an self-directed IRA account, in the role of a custodian.

Actually, custodian = control when it comes to voting. Really. I dare anyone to find the last proxy voting statment for a single company that their 401(k) or 403(B) (assuming you are as USA resident that is) for the companies that were held within those funds. You won't find it. Period the end.

So, the control will be more subtle. I would imagine it would take two forms: firstly, the government would create a set of rules about the types of investments possible. It's easy to see how these rules can mutate over time to impose more restrictions on companies. It might start with: "we cannot let people invest in risky penny stocks", it might slowly morph to: "It's wrong to let pension funds be used to invest in companies that do not do XYZ" (fill in the blank with some act that is considered an "obvious corporate social responsibility").

The second, and more subtle form of control, would be a strengthened claim to prosecute companies "in the public interests".

People forget that in all states and then in some states such as Mass did very much restrict what stocks could be purchased in IRA accounts. Nobody, even Bush and his supporters have suggested that people be able to invest in individual stocks. God, people can't even do that in their 401(k)'s for the most part without an act of congress. So even wasting thought on investing in individual equities or bonds for that matter (government or not) is equivalant of mental masturbation.

If we are "lucky", unlce George or Sam will grant us the "right" to invest in one of a very select choice on indexes. I really do feel sorry for the companies that are in those indexes becuase they are so truly screwed. It will be buy American, bring jobs onshore, unionize, blah blah blah for all of them.

I will be willing to honestly take bets with anyone on this board that if the Bush plan goes through that companies like Cypress, Sun Micro, Whole Foods, and anyone else who can afford it will either demand that S&P remove them from the index or take themselves private (and it's already happening thanks to the cost of SoX compliance) so that they can maintain private control of their companies.

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Scott,

Thanks for the clarification re: 401-K vs. IRA. Good to have a professional here. Since most of my personal retirement fund is in IRA rather than 401-K, I missed the crucial distinction. You're also right about being allowed to invest only in mutual funds and the like.

My point was that even allowing people to invest in private companies would still not convince me to support such a plan, unless even the "custodian" (if that's the right term for IRA-type self-directed IRAs) is private. As you pointed out, even to dream that I'd be allowed to do that is wishful thinking (to change your metaphor ever so slightly :thumbsup: )

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My point was that even allowing people to invest in private companies would still not convince me to support such a plan, unless even the "custodian" (if that's the right term for IRA-type self-directed IRAs) is private. As you pointed out, even to dream that I'd be allowed to do that is wishful thinking (to change your metaphor ever so slightly :unsure:  )

You're dead spot on about the custodian thing. The brokerage firm/bank that holds you IRA account for you is the custodian. Technically, you aren't holding your money in a trust account with you as the beneficiary.

As with all brokerage accounts, someone else can exercise your rights. In that brokerage account, you get those pesky notices via email or in thick packets in the mail every 1/4 or so often that ask you to voice your opinion on one thing or the other. Those are proxy rights. You are asked asked as a shareholder to run the company. If you do not vote your rights, then a majority or quorom (depending on the company) can't be maintained and things grind to a halt. So, what happens is the broker who is actually holding the shares for you (or if you have a mutual fund, you never get a chance to get a say in the individual holdings anyway) will vote. Actually, there is a company called Institutional Shareholder Services or ISS that everyone hires to do the voting for them.

It saves the broker/dealers from wasting time reasearching the goings on of every company under the sun. Plus it builds in a layer of insulation liability wise. ISS tends to rubber stamp matters and collect their paychecks. They rarely make waves. As mentioned before, it's only people like CALPERS that make waves and generally those are waves of the tsunami variety. So even if you could divert part of your FICA contribution into a Scottrade or Fidelity IRA, there would for sure be rules that restrict how ISS would be allowed to vote.

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